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Cash Burn Marks

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Live by the sword, die by the sword. That's what a slew of once-hot dot-coms are finding out, as their cash runs out and their stocks tank. Yesterday's darlings of the capital markets, formerly flush with cash and an inflated stock price, are getting vitally interested in finding new funding sources.

Take Theglobe.com, which builds online networks and communities for clients and individuals. Its initial public offering set a record in late 1998 for a single day bounce, but lately it has been trading at around $3. It announced in its recent 10Q filing that it has cash on hand for 12 months. Between the end of FY'99 and Q1'00, cash and cash equivalents dropped from $36.5 million to $19.1 million, and operating expenses in Q1'00 were $11.7 million (less amortization of goodwill and intangibles) on revenues of $6.9 million. Counting short-term investments, Theglobe.com has about $43 million (see "Waiting for the Dough," page 62).

Contacted via E-mail, Theglobe.com's CFO, Frank Joyce, didn't seem worried about the company's cash position, preferring to expound on the company's gross margins (60 percent) and on the scalability of the business model, which "will be differentiating factors whenever we approach the capital markets in the future," he says. But in the ever-changing jargon of E-commerce, scalability has been replaced with burn rate as a more pressing business concept on Wall Street.

It was easy to ignore the unsustainable cash burn rate of Theglobe.com and other dot-coms when their stock prices sat in the nosebleed section. Low stock prices has rendered a return to the market unlikely. And loss-based business models are no longer quite the investor magnets they used to be. So what, exactly, are these companies planning to do?

"It certainly seems that there would be some M&A activity emanating from market correction and capital constraints that some dot- coms would find themselves in," says Ray Beier, a lead partner at the U.S. structuring business at PricewaterhouseCoopers LLP. "It strikes me that the most logical sellers will be those that have the most viable business models, or are moving in that direction."

And therein lies the rub. Take online music retailer CDnow Inc. It pays nearly 70 percent of its revenues to its third-party fulfillment and shipping outsourcer, and last year had a net loss of $119.2 million on revenues of $147 million, ending the year with only $20 million in cash on hand, which includes $27.7 million in cash acquired during mergers. Although revenue growth was up 161 percent between FY'99 and FY'98, its stock, which hit the mid-30s in March 1998, now sits at around $4, making a return to the capital markets unrealistic. A planned merger with Sony Corp. of America and Time Warner Inc. fell through in March, but instead the potential partners bought $21 million in stock and replaced $30 million in short-term debt with convertible, long- term debt, all of which breathed a few more months of life into the ailing dot-com.

Despite the dismal long- term picture of such business structures, some market analysts cling to the belief that even the most ailing dot- com can find funding out there somewhere. Jordan Rohan, who covers Theglobe.com for Wit Soundview, says there's still lots of money floating around looking for an investment.

"There's plenty of capital," says Rohan. "You'd be surprised how many options a company has if it's having troubled times. Recapitalization is the key option. It could sell parts of existing businesses, or entertain offers from opportunistic investors, of which there are many, or it could sell the entire company."

So far, he seems to be right. A CDnow spokesperson says the company is entertaining more than two dozen offers from a variety of potential partners and investors, and expects to close a deal by the end of Q2'00.

Some Internet concerns are being pulled out of the fire by brick-and-mortar and E-commerce companies alike. Online grocer Peapod Inc. was recently rescued by a 51 percent investment from Royal Ahold NV. Drkoop.com, which announced in April that it had cash on hand for only five months, recently restructured its licensing deals with America Online Inc. and Walt Disney Co.'s Go.com, and converted its $100 million cash commitment to a stock payment that gives AOL a 10 percent stake in the company. While postponing possible bankruptcy proceedings, it does little for their dismal cash position.

Even optimistic Rohan admits that, long-term, some of these companies won't survive. "None of the capitalization options change the fundamentals of the business," he adds. "Their problems won't go away."